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Grocery sales will feed Wal-Mart in its battle with Amazon

February 24, 2017 10:34 AM
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(Bloomberg Gadfly)—For Wal-Mart Stores Inc., the best way to investors' hearts could be through their stomachs.

Shares in the world's largest retailer rose 4% Tuesday right after it reported a 1.9% gain in sales at established U.S. stores in the latest quarter from a year ago, including a 29% jump in domestic online sales.

While much of the focus was on Wal-Mart's investments in e-commerce and labor, its success could come down to something more basic: food.

With its gargantuan aisles filled with everything from video games to paint brushes, it's sometimes easy to forget Wal-Mart, No.  4 in the Internet Retailer 2016 Top 500 Guide, is America's largest grocery store. It gets 56% of its U.S. sales from food and grocery items. The strength of its grocery game can often make or break a quarter.

Wal-Mart's blockbuster online sales growth in the U.S. in the latest quarter was driven partly by groceries purchased online but picked up at new drive-through stations in store parking lots. Globally, online sales rose by only 15.5%, a deceleration from previous quarters. Wal-Mart has been expanding grocery pickup in the U.S., with 600 locations currently, and it plans to double that number by next year.

More than likely, food also played a big part in Wal-Mart growing sales at established U.S. locations at the fastest pace in four years. Wal-Mart has been drastically cutting food prices in its stores, which has helped it fight back against the dollar stores that have eaten into its market share.

Wal-Mart's price cuts over the past year came as U.S. grocery prices fell by the most since the 1960s. If inflation picks up as much as the Federal Reserve is predicting, then Wal-Mart will be able to pocket the extra dollars in price differences.

Plus, until Amazon.com Inc. (No. 1 in the Top 500) figures out how to crack online grocery, food is Wal-Mart's most defensible area against Amazon.

Bananas, milk and other food items tend to be the biggest drivers of customer traffic. Selling food lets Wal-Mart bring in billions of dollars from customers on food stamps. And it's one of the few areas where Wal-Mart would take less of a hit if any kind of border-adjustment tax is pushed through, as a greater proportion of Wal-Mart's food is actually made and sold in America, compared with categories such as clothing and electronics.

Of course, this is not a time for Wal-Mart to get complacent. Amazon is nipping at the heels of its grocery business.

The e-commerce giant is investing in its fresh offerings and recently got clearance to participate in a pilot program to offer delivery to food-stamp recipients. Amazon is already testing out bricks-and-mortar convenience stores and has ambitions for bigger grocery stores. Plus, with more shoppers now visiting Amazon than going to Wal-Mart on a regular basis, it's only a matter of time before shoppers start to turn to Amazon for more of their grocery needs.

Wal-Mart should stay hungry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

 

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